Tag Archives: Economic Policy

Is inequality in Malaysia going up or down? Answers differ. Official statistics unambiguously show household income inequality going down in the past decade, but almost everyone seems to think it has gone up. So what’s going on?

The most common measure of income inequality is the Gini coefficient. It suggests falling inequality in Malaysia. The Gini coefficient fell from 0.46 in 2002 to 0.43 in 2012. This Gini coefficient series was calculated using Malaysia’s Household Income Survey — a large sample, consistent and nationally representative dataset. Statistics derived from this source carry substantial weight.

But popular perception and anecdotal accounts view the issue differently. Most people seem to think that inequality has been rising, or at least persisting at high levels. The dissonance between the official figures and public perception warrants further investigation.

Rising inequality also loomed large in Malaysian popular discourse in the 1990s. But across that period, official statistics backed up popular perceptions — Malaysia’s Gini coefficient increased.

Public policy has for decades been preoccupied with targeting and monitoring reductions in inequality between ethnic groups. But the data and the policy direction seem to be at odds. Since 2010, some ethnicity-blind programs have been introduced to target the exclusion and lagging socioeconomic progress of the bottom 40 per cent of households. But this group actually had the highest income growth in the preceding decade. From 2002 to 2012, mean household income for the bottom 40 per cent grew by 6.1 per cent annually, compared to 5.6 per cent for the middle 40 per cent and 4.6 per cent for the top 20 per cent of households.

Why are low income households still considered to be in great need of assistance when their incomes have improved significantly?

Inequality is a zeitgeist issue that has resonance materially, politically and emotionally, regardless of official Gini coefficients. The notion that inequality has risen is believable because of a wider malaise in Malaysia. Malaysians are dissatisfied with rising prices, sluggish wage growth and economic insecurity. Many also resent the concentration of wealth among elites, especially through political-business connections or suspiciously corrupt means. Continual reports of misappropriation of public funds and the lavish livelihoods of corporate, financial and political elites tend to reinforce perceptions of unfairness and unequal opportunity.

Surveys by the Merdeka Center offer some insight into public opinion. In recent years, concerns over economic conditions, especially inflation, employment and wages, have grown. In April 2005, the top concerns were crime and public safety (16 per cent of respondents deemed this the biggest national problem), inflation (10 per cent), business opportunities and economic growth (9 per cent), with unemployment/lack of job opportunities (4 per cent) further down the list. In October–November 2012, the majority considered price hikes/inflation/rising cost of living to be the most pressing issue (23 per cent), followed by crime (7 per cent), unemployment/lack of employment opportunities (6 per cent) and unfavourable economic conditions (6 per cent). It is possible that Malaysians are simply conflating the general economic environment with inequality.

But it is also important to remember that everyone experiences inequality differently. For example, household income inequality need not move in the same direction as personal wage inequality or household wealth inequality. And the Gini coefficient isn’t the only way of measuring income inequality, either.

Malaysia’s official inequality statistics are calculated based on gross household income — that is, adding together all forms of income from multiple sources, including earned income (wages and self-employment earnings) and non-earned income (rent, dividends, transfers, remittances, and so on). It also counts multiple earners in the same household. This highly aggregated calculation can mask the effects of wage growth and asset accumulation, and other factors that affect inequality.

The full Household Income Survey datasets are also not available, meaning research in this field must assemble data from other sources.

One of these sources is data from the Employees’ Provident Fund (EPF), which allows us to calculate wage inequality over time. Formally employed private sector workers maintain accounts with the EPF, which had 6.5 million active members in 2013. Members regularly contribute to their accounts from basic wages and receive dividend payments, at uniform rates regardless of the size of the account. So changes in the distribution of EPF accounts will likely reflect changes in the distribution of wages. And the Gini coefficient of EPF savings accounts has been rising, giving us grounds to believe that wage inequality has increased in the past decade or so.

Other sources concur with a broad picture of steadily rising inequality. In the public sector, the number of managers and professionals at the upper regions of the wage distribution has grown disproportionately faster. Luxury cars constitute an increasing share of passenger vehicle sales, while property sales show rising concentration at the upper end.

Popular perceptions of rising inequality, it turns out, are supported by empirical evidence. Household inequality may be falling, as the data suggests, but other forms of inequality are rising.

Malaysia needs to pay more attention to wage distribution and labour market dynamics as well as wealth inequality. There are indications that wage inequality is rising, as well as widespread concerns over wage growth, household livelihood and housing affordability.

And the rich Household Income Survey datasets need to be made available for exploration — again, to investigate earnings and wealth, and to disaggregate personal and household dimensions. Only then can we really begin to untangle the complexities of inequality in Malaysia.

Hwok Aun Lee is Senior Lecturer in the Department of Development Studies at the University of Malaya. This article draws on aworking paperco-written with Muhammed Abdul Khalid.

ASEAN needs a ready and capable steward in 2015 and Malaysia looks to be in the right place at the right time. Malaysia has made clear that realising the ASEAN Economic Community (AEC) by the end of the year will be its main goal for its 2015 chairmanship of ASEAN. In this regard, a recent essay by Malaysia’s Minister of International Trade and Industry Mustapa Mohamed provides subtle but significant indicators of the government’s leadership objectives and the approach to accomplish this. While the essay by no means represents a definitive official policy statement, it provides an encouraging affirmation of the growing need to address non-tariff measures (NTMs) and to galvanise the concept of an ASEAN identity.

First, Minister Mustapa makes clear that Malaysia will not avoid the crucial and politically sensitive task of addressing protectionist measures imposed by other ASEAN members. If successful here, Malaysia’s effort could help set expectations for a new standard of behaviour. This would help mitigate and nullify the most significant challenge that stands in ASEAN’s way to realising a region characterised by ‘free movement of goods, services, investment, skilled labour, and freer flow of capital’.

Protectionism in ASEAN — such as local content requirements, mandatory product standards and import restrictions — is rampant, and this is most remarkable for the trade in goods. Binding tariff elimination commitments under the ASEAN Trade in Goods Agreement (ATIGA) has resulted in duty-free treatment for more than 90 percent of tariff lines. ASEAN members generally have little recourse to shield unprepared or nascent local manufacturing industries from exposure towards the AEC.

Consequently, the number of NTMs imposed has grown even though they contravene the goals of the AEC and distort intra-regional trade. Despite commitments under the ATIGA to identify and eliminate NTMs, little to no progress has been made. Malaysia’s plans to prioritise this issue can help set the tone and momentum for ASEAN to conduct a serious and honest examination on NTMs.

Second, as Minister Mustapa rightly highlights, misinformation means there is persistent scepticism — especially from industry — about the tangible benefits (and costs) of liberalisation measures under the AEC. Consequently, Malaysian Prime Minister Najib Razak has stated that under Malaysia’s leadership, ‘the people must understand what actually ASEAN is and what ASEAN is doing’.

There has already been an effort to address the information gap. In November 2014, ASEAN foreign ministers launched the ASEAN Communication Master Plan (ACMP) to provide a framework for communicating the character, structure and overall vision of ASEAN to its stakeholders. While the publication sets a useful baseline, Malaysia’s Ministry of International Trade and Industry (MITI) could help upgrade this effort. It could push for precise and actionable information to all of ASEAN, particularly concerning market access opportunities and preferential treatment from the AEC. Leading by example, MITI’s ‘Promoting Trade’ webpage is arguably one of the most updated and comprehensive sources of public information on trade agreements available today.

Malaysia will also seek to lead ASEAN in overcoming the rising backlash of nationalism against liberalisation under the AEC. The AEC has a public relations problem that has arisen not from the nature of free trade but from the way ASEAN member states have packaged it. Citizens feel disenfranchised and overlooked by the AEC.

Governments need to apply narrative that registers with the public and leads to a sense of ownership. In the near term, ASEAN will need to carefully assess and methodically build popular support for the next phase of the ASEAN integration process. Success will be essential for the ASEAN members to build support for greater economic integration under AEC 2025, which envisions an emphasis on a green economy, greater connectivity and common positions on global issues.

Finally, referring to the institution’s longstanding consensus-based and non-confrontational working style, Minister Mustapa stresses that the ASEAN processes will continue in the ‘ASEAN way’. This principle, which effectively grants veto power to each ASEAN member state, has met numerous criticisms. But it has helped ASEAN pursue regional liberalisation and integration, while ensuring that less-developed economies have an equal opportunity to participate in and benefit from them.

It is worth noting that Article 21(2) of the ASEAN Charter allows a sub-group of ASEAN member states to move forward on a regional effort if there is consensus to do so. While applications have been limited, the risk of creating a fragmented two-track, two-speed system remains. Certain ASEAN member states have continually lagged behind and have no capacity to participate in or debate different approaches. Malaysia’s back-to-basics approach through the ‘ASEAN way’ may reflect the interest in ensuring all ASEAN members are fully on board for future major regional integration efforts. More importantly, they will have the roadmap and resources to do so at the outset.

It would be unrealistic to expect Malaysia to overcome several years’ worth of delays and disagreements over non-compliance in the AEC implementation process. But MITI’s clear perspective on the leadership ASEAN needs provides a basis for optimism that ASEAN can focus its will and resources to implement the ‘last mile’ integration measures the region needs in 2015.

Daniel Wu is an international trade analyst based in Bangkok and a Non-Resident WSD-Handa fellow with Pacific Forum CSIS. All views expressed here are his own.

Malaysia’s government-linked companies (GLCs) are, relatively speaking, among the most extensive and powerful in the world in terms of capitalisation, market presence and socio-political mandate.

GLCs reportedly comprise 36 per cent of the Malaysian stock exchange’s capitalisation and 54 per cent of the entities that make up the Kuala Lumpur Composite Index. The Malaysian government controls GLCs through its government-linked investment companies (GLICs) — gargantuan and powerful investment arms including Khazanah Nasional, Permodalan Nasional Berhad — and the Ministry of Finance.

GLC market presence varies by industry, as measured by share of value-added. Based on data from publicly listed companies, Asian Development Bank lead economist Jayant Menon estimates that in 2012 GLCs accounted for 93 per cent of income in utilities, 80 per cent in transportation and warehousing, and over 50 per cent in agriculture, banking, formation and communications, and retail trade. Menon further notes that GLCs invest at a higher rate than private companies due to their superior reserves and political connections, which give them added leverage and privilege. Menon argues that GLCs crowd out private capital, significantly accounting for Malaysia’s anaemic private investment rate since the 1997–98 Asian financial crisis.

The statistical finding that GLCs crowd out more investment than they stimulate makes sense intuitively. It also appears to be consistent with the economic situation in Malaysia. But Menon’s data limits his empirical analysis to publicly listed companies. The omission of privately held businesses, especially in manufacturing and in service industries such as retail, probably leads him to overstate the dominance of GLCs.

Yet the Malaysian government cannot deny the crowding-out phenomenon. As part of its GLC Transformation Program the government has committed itself to divesting certain GLCs. But, as expected, the divestment project targets smaller entities within its massive portfolio and has progressed behind schedule.

The durability of GLCs as a domain of government policy underscores the need for reform prescriptions to be informed by historical and political economy perspectives and to acknowledge GLCs’ socio-political mandate. Developing the Bumiputera (ethnic Malay) Commercial and Industrial Community (BCIC) has been at the forefront of policy since the New Economic Policy was launched in 1971. The BCIC passed through various phases, from reliance on state development agencies, to heavy industry, then to privatisation from the late 1980s until the Asian financial crisis, which saw the renationalisation of many failed companies.

These entities, rebranded as government-linked companies, have become the primary agents for the BCIC agenda, which remains, like it or not, an unfinished business and political imperative. In other words, affirmative action, through managerial development and preferential procurement, is deeply embedded and cannot be drastically rolled back.

Interestingly, criticisms of the BCIC never oppose the policy objective of Bumiputera participation and ownership. Instead arguments typically assume that scaling down GLCs, divestment and privatisation, and rolling back preferential treatment will jolt Bumiputera entrepreneurs and capitalists into emerging as a competitive, innovative force. Competitive Bumipitera capitalists, it is argued, should be the true beneficiaries of affirmative action. But this argument is invariably asserted as an article of faith, unsupported by evidence. Logically, the shortfalls of the BCIC agenda drive the conclusion that privatisation would diminish Bumiputera participation.

If the policy has failed to produce a critical mass of competitive Bumiputera entrepreneurs — as it was widely supposed it would — wouldn’t sudden removal almost definitely cause a downturn in Bumiputera participation? This would be a politically unpalatable outcome regardless of any boost it might bring to private investment rates. Failure or reluctance to openly acknowledge these eventualities and their political consequences often precludes robust examinations of GLC performance and their preparedness for phasing out their role in supporting the BCIC.

Malaysia’s GLC policy, on the other hand, preserves its role in promoting the BCIC, but also introduces its share of equivocation. The GLC Transformation Program articulates merit-based selection as a key feature of the new government policy, implicitly distinguishing the current regime from former practices that bred inefficiency. This is only partly correct: ‘merit-based’ means selecting more capable Bumiputera managers, subcontractors and vendors over less capable Bumiputera managers, subcontractors and vendors.

Amid the misinformation, the program lacks a clear plan on how to move away from overt Bumiputera preference. The government needs to come clean and acknowledge that ‘merit-based’ selection remains exclusive to Bumiputera participations. A fuller transformation would entail ensuring that these Bumiputera business empowerment programs are conducted effectively, so that transition plans can also be developed to phase out overt ethnic preferences.

The GLC Transformation Program, under the oversight of the government investment agency Khazanah, involves the 17 largest and most strategically important GLCs, including Tenaga Nasional (power), Telekom (telecommunications), Malaysia Airlines, diversified conglomerate Sime Darby, CIMB Bank and Maybank.

Market conditions and the business performance of these GLCs vary. Some, such as CIMB, Maybank and Axiata (under Telekom) are expanding to be regional players, while others are confronted by structural challenges or, like Malaysia Airlines, beleaguered by recent tragedies.

Internal reviews of GLCs have written glowing reports. It is not surprising that GLCs generally outperform private companies, given their structural and political advantages. Also, GLCs have not, in the past decade, been engaged in the pervasive profligacy and profiteering seen in the 1990s.

GLCs continue to serve key roles providing services, generating profits for GLICs and other stakeholders, serving as training grounds for managers, directors and entrepreneurs through the employment they offer, and by providing linkages through procurement and subcontracting. But the efficacy and integrity of these programs has not been rigorously and independently analysed. Too much of the GLCs’ and GLICs’ operational performance, financial flows and pursuit of their socio-political mandate remain under-researched.

Hwok-Aun Lee is Senior Lecturer in Development Studies at the University ofMalaya.

World oil prices are falling precipitously. For an oil exporter like Malaysia, that’s definitely bad news. Unless the country can diversify its economy, it may find it difficult to navigate its way through the economic challenges it faces on its way to higher income status.

Of course, the drop in the world price of crude oil, as much as it has hogged the headlines, is just the most visible manifestation of a larger movement. Many commodity prices have been hit over the last six months. While the price of a barrel of Brent Crude has dropped 45 per cent since June 2014, both soybean and iron ore prices have dropped over 25 per cent. Taken from the beginning of the year, the drop in iron ore, at 49 per cent, has actually been steeper than crude oil, at 43 per cent. This is in some portion a reflection of the stronger US dollar, but only partly explains the commodity price collapse. In truth, it could be said that the high commodity prices over the last decade or so was an exceptional break in a longer term trend of declining commodity prices.

It’s well established that commodity prices tend to decline over the long run relative to the prices of manufactured goods. This fact has formed one of the foundations of economic development strategy: to achieve stable, higher incomes, emerging economies need to actively foster the development of secondary and tertiary sectors.

That piece of wisdom has now been underscored with a vengeance. While oil-producing economies have hit the headlines, the impact is being felt across a swath of commodity producers, from Australia (iron ore) to Brazil (soybeans) to Chile (copper). Demand for commodities tends to be inelastic — an increase in supply will lead to large falls in price rather than large increases in volume, meaning lower revenues. For commodity producing economies, changes in the world prices of the commodities they export have immediate consequences for trade balances, GDP growth, and government finances.

Malaysia’s position as a net exporter of oil and gas is a case in point. Malaysia’s exposure to global primary commodity prices remains uncomfortably high, although it is well down from the very high exposure of the 1980s, when agriculture and mining accounted for over a quarter of the Malaysian economy. Efforts to diversify the economy away from the primary sector have been for the most part successful but incomplete.

To take one example, despite a quarter of a century of extracting crude oil, Malaysia still lacks the capacity to refine all the oil it extracts. Malaysia’s palm oil industry, another major export earner, is similarly stuck in mostly upstream production. The relative failure to move downstream into higher value added production, a problem masked by the high prices prevailing over the last decade, leaves Malaysia vulnerable to global price swings in the notoriously volatile commodity markets.

The immediate consideration for Malaysia going into 2015 in this environment is in sustaining growth and maintaining macroeconomic stability. The impact on the oil and gas industry is probably manageable, except for those involved in marginal field production. Given the long gestation period for these kinds of projects, oil companies are understandably conservative in their investment decisions.

A secondary consideration would be the impact on fiscal sustainability. The oil and gas sector directly contributed a third of the government’s revenue in 2013, and an even higher proportion indirectly through corporate taxes on downstream production of commodities like liquefied natural gas (LNG). A decline in oil and gas revenues would also have secondary effects on other sectors, such as transportation and finance.

Under threat is the Malaysian government’s target of cutting the 2015 budget deficit to 3 per cent of GDP, and of maintaining the soft cap on government debt at 55 per cent of GDP. Falling commodity prices could also damage Malaysia’s prospects of achieving high income status by 2020, because of a decline in the growth rate of nominal GDP as well as the depreciation of the ringgit.

There exist longer term threats to Malaysia’s external and internal balance. The LNG market is of far greater importance than crude oil to Malaysia, and here two developments do not augur well: Japan is slowly reviving its nuclear industry (Malaysia currently supplies a fifth of Japan’s LNG demand) and the export potential of US shale gas (natural gas prices in the US are half the equivalent Asian prices). If either or both of these come to pass, it would undercut Malaysia’s export revenues.

Malaysia needs to accelerate the diversification of its economy, either by moving further into downstream production or by fostering a swifter expansion of the manufacturing and services sectors. Another priority must be reducing the dependence on oil and gas revenue in the budget. If Malaysia doesn’t take action to limit its vulnerability to lower commodity prices, it may find 2015 marks the start of a much more difficult economic story.